Don’t Discount The AI Potential Of Ambarella; Buy On The Dip

Key Points

• Ambarella fell hard after guidance failed to show a surge in demand for AI technology. 
• The company is well-positioned for the AI boom but may not be part of the 1st wave. 
• The analysts rate the stock a Buy but have been trimming their targets and capping gains in 2023. 

Some high expectations were built into the Ambarella NASDAQ: AMBA market, driven by NVIDIA’s NASDAQ: NVDA blow-out report and the outlook for AI. Ambarella’s CV3 (3rd gen computer vision) system-on-a-chip family puts the company in a prime position for the AI boom. The caveat is that Ambarella’s AI technology is focused on computer vision for IoT and EV applications, and that isn’t where investor attention is focused now. Investor Attention is focused on generative AI/data center names like NVIDIA, Advanced Micro Devices NASDAQ: AMD, and Marvell NASDAQ: MRVL because they represent the first wave in the build-up of the AI age. The takeaway is that Ambarella’s Q1 report and guidance did not reflect the AI boom as expected, but they will. 

“We are pleased to announce our first CV3 platform win through our partnership with Continental … in a L4 commercial vehicle application,” said Fermi Wang, President and CEO. “... we are taking our inference AI strategy to the next level with our R&D investment focused on the build-out of our CV3 platform as well as new derivatives of our 3rd generation AI technology.”

Ambarella Has a Solid Quarter, Guided Weak 

Ambarella had a decent quarter but did not provide the market with a catalyst to justify the 15% run-up in share prices before the release. The company reported $62.14 million in revenue, which beat the consensus but only by 20 basis points and is down 31.2% compared to last year. The decline is due to cyclical headwinds that have reduced or pushed off demand in end markets, and there is no indication of a pick-up anytime soon. 

The company’s margin contracted compared to last year, but the details are not all bad. The gross margin declined by 70 basis points, and the operating loss widened, but GAAP and adjusted earnings were better than expected. An increase in R&D spending was offset by a decline in SG&A that left the adjusted EPS at -$0.15 compared to the -$0.21 forecast by the Marketbeat.com consensus figure.  

The bad news is that Q1's relative strength did not lead to positive guidance. The company expects revenue to run flattish compared to Q1 versus the consensus figure, which expected about 10% sequential growth, and the whisper figures suggested an NVIDIA-like blowout was possible. 

The Analysts Will Cap Price Action In 2023 

The analysts rate Ambarella a Moderate Buy, but their activity will cap gains in 2023. The consensus price target is about 25% above the post-release price action but has been trending lower all year. The downtrend in the consensus target is not likely to end with the new guidance, but there is some good news too. The downtrend in the consensus target is due primarily to the top end of the range coming down; the most recent targets are reduced but to levels above the consensus. In this light, the analysts will likely cap gains in 2023 but will also support the market within its current trading range. 

The chart of Ambarella price action is worrisome. The pre and post-release action have the market set up to form an Abandoned Baby, a potentially bearish scenario. The Abandoned Baby may precede a downtrend but, in this case, represents a critical point of resistance. If the market can not move above the $80 level soon, the odds of range-bound trading in the 2nd half of the year will grow.